Global crude prices have crashed over the past few months and so has the stock market. But irrespective of the prices, the search for ‘black gold’ continues unabated across the world. A number of countries are battling falling crude oil production, while in India, which imports over 70% of its requirement , energy security is at stake.

Recently, the government awarded 44 oil blocks under the seventh round of the New Exploration Licensing Policy (NELP) and is preparing for the eighth round in early ’09. This indicates that the boom in the exploration and production (E&P ) industry is unlikely to slacken in the current economic downturn.

The trend is already being reflected in the fattening order book positions of domestic companies operating in the E&P support industry, which are helping oil majors in their exploration efforts. A multiplicity of projects and paucity of equipment means that in several cases, these companies secured confirmed contracts for their equipment, even before their actual delivery.

Aban Offshoreis India’s largest owner of offshore drilling rigs with a fleet of 20 drilling vessels and one floating production unit (FPU). Its results for the preceding four quarters indicate the upturn in its earnings, which is likely to continue in future. Drilling charter rates, which had reached unprecedented levels earlier, are now off their highs in global markets.

But Aban Offshore already holds firm charter contracts worth over Rs 4,000 crore for the next 12 months, which is nearly three times its turnover in the past 12 months. Also, for half of its vessels, the charter rates are locked for more than 24 months, giving stability to its future revenue growth. Great Offshoreis India’s second-largest offshore support company, operating a fleet of 41 vessels, including offshore support vessels (OSVs), drilling rigs and a construction barge.

The company posted uninspiring results in the preceding two quarters due to changes in accounting of gains and losses in foreign exchange (forex). The company entered into port management and other related services via acquisition of a couple of companies on India’s east coast, adding another 19 vessels to its fleet. It is adding more vessels and expanding into marine construction to boost growth.

Jindal Drillingentered into joint ventures with Singapore-based Discovery Drilling and Virtue Drilling, respectively, both of which have secured firm contracts from ONGC for offshore drilling rigs under construction. Of these, Discovery Drilling’s rig has commenced its contract with ONGC for three years, while Virtue Drilling’s rig will be deployed from mid-December ’08 for five years. These contracts will add significant revenues to the company on a consolidated basis.

Dolphin Offshoreoffers marine and subsea engineering services, mainly to ONGC in western offshore. After working for a long period as a sub-contractor on ONGC’s offshore EPC contracts, the company has recently become eligible to bid for them as the main contractor. The company sold off two of its old vessels and its office premises over the past 12 months, which has boosted its numbers. It carries an order book of Rs 400 crore to be executed by December ’09.

Shiv-Vani Oilis India’s largest onshore exploration support company. Onshore exploration is more of a local industry unlike offshore exploration, which is an international industry. So, the company faces little competition in India, which is reflected in its order book of Rs 3,600 crore to be executed over the next three years. The company’s cumulative revenues for the past three years were less than Rs 1,000 crore. It already has 34 drilling rigs with six more on order.

All these 40 equipment will be deployed by end-FY 09. Seamec, the Mumbai-based owner of four multi-support vessels (MSVs), has put up a disappointing show over the past 12 months. The upgradation of the vessel it purchased was delayed by nearly a year, while another of its vessels remained out of waters due to an accident. To make matters worse, a couple of its clients filed for bankruptcy in the US, making dues irrecoverable.

However, it seems to be back on track now, with all its four vessels deployed gainfully. As the company’s vessels are used in sub-sea engineering, repairs and maintenance, the crash in crude oil prices is unlikely to impact it.

The current weakness in the rupee is beneficial to all these companies, which are net earners of forex. However, the presence of foreign currency loans on their books means they will have to write off the losses due to forex fluctuations. A high debt-equity ratio can be a big concern for the companies operating in this industry.

However, they have secured revenue sources with sufficiently high interest-coverage ratios. Also, one must take into account the current scenario, where debt is the only way of raising finances for these fast-growing companies. The current market turmoil has pulled down the high valuations these companies were enjoying just a few months ago, which offers a good entry point for long-term investors. 

Source: The Economic Times; Ram Krishna Kashelkar